Tuesday, 6 January 2009

New Balls Please?

Peter Gowan has an exceptionally interesting piece in the current New Left Review: Crisis in the Heartland. In it he lays out the case for not seeing the credit crunch as due to some flaws in the system but as an intrinsic aspect of what he calls the 'New Wall Street System' itself. He makes the point that it would be wrong to blame hedge funds or 'speculators' as, in reality, it was the central institutions of the system who were speculating - and speculating in a purposeful and systematic way:

Both the Washington regulators and Wall Street evidently believed that together they could manage bursts. This meant there was no need to prevent such bubbles from occurring: on the contrary it is patently obvious that both regulators and operators actively generated them, no doubt believing that one of the ways of managing bursts was to blow another dynamic bubble in another sector: after dot.com, the housing bubble; after that, an energy-price or emerging-market bubble, etc. .... the operational belief systems of what might be called the Greenspan-Rubin-Paulson milieu seems to have been post-Minskian. They understood Minsky’s theory of bubbles and blow-outs, but believed that they could use it strategically for blowing bubbles, bursting them, and managing the fall-out by blowing some more." (My emphasis)

But what really caught my eye was his use of the term 'wimbledonized' to describe London's role in all this. I take this to mean a situation where a particular location plays host to a important game but never wins it.London was a key part of what Gowan calls 'the shadow' (i.e. lightly regulated, or unregulated) banking system outwith the formal controls.

"By the early 1990s the American investment banks had wiped out their London counterparts and dominated the Square Mile’s asset markets, with the City acquiring an increasingly ‘wimbledonized’ role within the New Wall Street System. Gordon Brown institutionalized the new relationship in 1997 by creating the unified Financial Services Authority, which claimed to operate according to ‘principles’ rather than binding rules: one central principle was that the Wall Street banks could regulate themselves. London thus became for New York something akin to what Guantánamo Bay would become for Washington: the place where you could do abroad what you could not do back home; in this instance, a location for regulatory arbitrage."

At the end of the piece he predicts that the idea of 'public utility' banking will gain a renewed respectability - which will create problems for the EU as well as the States. As part of this, the idea of capital controls and non convertible currencies, on the Chinese model, may come again to be seen as necessary. He's not a catastrophist - a weakened America will still dominate the financial architecture of the world in his view. But it will probably squander its chance to re-invent itself as an industrial power and become increasingly caught in debt subordination to East Asia.

The question that I'm left with, however, is whether Britain can necessarily expect to even have such a 'breathing space' to squander.